It’s #BusinessQuickie, and I want to come on here and tailor this go-live to our small business owners who want to know the difference between contractors (1099) and employees (W-2) so that you can find which employee fits best with your business. I figured this would be a great topic since labor day is coming up on Monday! Let’s get started.
You might ask why is it important to know the difference? First, if you misclassify an employee as a contractor, it can lead to penalties and fees, so we want to avoid that at all costs.
So, what is a W-2 employee? Well, a W-2 employee is a typical employee that works for you either part-time or full-time. With W-2 employees, you must withhold payroll taxes from their paychecks, and your business pays the payroll taxes on their earnings. The W-2 employee can be either hourly or salaried. When it comes to labor laws, such as minimum wage and overtime, W-2 employees are protected.
In contrast, a 1099 worker usually works for you part-time. When it comes to payroll taxes for 1099 workers, your business doesn’t need to withhold taxes or pay taxes on their earnings. The contracted employee is never salaried and is less protected by labor laws.
Now, which is best for your business? Well, there are pros and cons to both.
The pros of working with 1099 workers are fewer costs because you don’t have to pay payroll taxes for them, you don’t have to pay worker’s compensation insurance or provide benefits like healthcare, and because your business is not subject to the same labor laws that apply to W-2 employee’s; you’re less likely to be sued on the grounds of labor laws. A Contracted employee also makes for a more casual relationship between your business and the employee, so there is more flexibility. However, the cons of hiring contracted workers are they generally have a higher hourly rate than W-2 employees, and the casual relationship I just talked about can backfire since they don’t understand your company’s culture and they are less likely to be available to you and your company when you call them needing their assistance on a whim.
The pros of working with a W-2 employee are it much easier to hire W-2 employees since most people aren’t looking for contracted work. There is also more versatility with W-2 employees since they can pretty much do anything you might need them to since their role is less defined than a contracted employee’s role. The W-2 employee will be more reliable since they usually work for you full time and understand the company’s culture. The cons are, of course, they cost more regarding payroll taxes and benefits, and just how they are more reliable to you, you also have to be dedicated to them in the form of following labor laws.
In summary, both types of employees can be an excellent fit for your business, depending on what you need them for. Just DON’T you accidentally file a contractor as an employee or vice versa as the other because the IRS will fine you with penalty fees. That’s it for the #BusinessQuickie. Happy labor day! Enjoy your weekend, drop a comment, and I will see you next time.